Rudi's View | Sep 11 2024
In this week's Weekly Insights:
-Asking The Important Questions
-All-Weather Model Portfolio
-Gen.Ai - A New Section On The Website
By Rudi Filapek-Vandyck, Editor
Asking The Important Questions
Two-and-a-half years ago the Federal Reserve started what became one of its steepest tightening cycles in history. Two-and-a-half years and we are still debating whether the US economy, and possibly the global economy in extension, might be heading into economic recession.
Weak manufacturing and a deteriorating US jobs market are weighing on investor sentiment at the same time as record new highs for equity indices and the seasonally treacherous September-October period combine. It's almost a guarantee for a spike in day-to-day volatility.
Can this get ugly? Of course, it can. Short-term market movements are equally determined by market specific characteristics such as concentration in popular stocks and technical trading. Investor sentiment under most circumstances is closely linked to how share prices and markets are performing.
By definition this also implies any bump in the road leads to sharper price moves, given many shares are trading on high multiples, and sharper price moves tend to impact on sentiment broadly. In simple market parlance: more selling begets more selling begets more selling. Before we truly understand what is happening we might be witnessing a new trend in the opposite direction.
As investors, how we prepare and respond to this risk depends on a few crucial factors:
-what kind of investor are we?
-what's our specific strategy and horizon?
-what kind of assets do we own?
Almost thirty years of actively covering and monitoring financial markets have taught me more than a few invaluable lessons. One of such lessons is: there's no such thing as a one-size-fits-all approach for investing in the share market. If we eliminate the level of experience everyone brings to the table, then those three key ingredients should guide us through the rest of the calendar year, and beyond.
But first of all, let's start with that all-important question that is weighing on general sentiment: economic recession, yes or no?
US Recession: Waiting For Godot?
Negative reads emanating from global manufacturing, US labour market surveys and the dis-inversion of the US bond market have put the possibility of a US recession yet again front and centre of financial markets' focus. But the debate remains far from conclusive because so many other signals and indicators are not pointing in the same direction.
Macquarie's lateral thinker Viktor Shvets summarises the current set-up as follows:
The private sector is in good shape and despite robust multi-year tightening, investors have not witnessed a jump in bankruptcies, bad debts or widening of spreads. This is due to higher government spending. However, even more importantly, it is illustrative of benefits of massive excess capital that cushions real economies.
My own view in this matter has fundamentally changed too. Two-and-a-half years ago I thought there's simply no chance today's economies can withstand such a big change in central bank policing, but hey, they have all this time and I have gradually come to accept things are sufficiently different from what they were in the past to make economic recession not the default outcome from the bond yield normalisation process that has taken place.
The best way to illustrate what I am talking about is happening close to home, in Australia. My anecdotal observations are that mortgage holders are suffering, many more households are under serious duress, while numbers of small businesses are forced to pull up stumps, in hospitality in particular.
These are all characteristics of an economy that is heading for recession. If it wasn't for immigration, Australia most likely would have already printed negative GDP numbers at least once. But it hasn't. And it is not simply a matter of allowing enough fresh consumers into the country.
There are swathes of people in today's society who have absolutely no idea what all the fuss about inflation, interest rates and budget pains is about. House prices have not gone down (quite the opposite) and the same applies to equities. The end outcome is an extremely bifurcated society with lots of pain and limitations on one hand but undeterred spending in the opposite corner.
It's not any different for ASX-listed corporate Australia. As yet again highlighted during reporting season in August, the squeeze is on and it remains on for large groups of Australian businesses, while others are enjoying the most favourable conditions in their corporate lifetime to date.
The same bifurcation is on display in North America too.
The sum total for all of the above can still become a negative GDP reading for a given quarter, who knows? But if that actually matters is really dependent on what's in the portfolio. Strong, healthy companies carried by megatrends and sustainable margins can, of course, become too popular and over-priced, but the odds remain in favour of them enjoying the same supportive characteristics irrespective of the GDP prints to follow.
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